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Your company pension benefits may be reduced by a quarter!

The latest assault on your company pension benefits may leave you and thousands of other people as much as 25 per cent worse off after the Government intend to change the way company pensions are calculated.

The purchasing power of your pension benefits will therefore NOT keep up with 'real' inflation!

What has happened with all those gold-plated retirement plans?

I am afraid, it all depends on how old you are . . .

If you have been working in the private sector for ten, twenty or even thirty years, you may recall, the so-called defined benefit – or final salary pension schemes.

If you one of the lucky ones, you may well be a member of one or several of these schemes.

Members of final salary pension schemes were promised a pension based on a percentage of their final salary on retirement. The employers paid into these schemes the equivalent of a very generous 15-20 per cent of your salary.

This is all distant memory, though!

Until the latest assault on our company pensions, if you are an 'old-timer', like me, you may well have been reasonably ok. However, if you have started working for the first time only recently, or if you started to work recently for a new employer the situation has only got worse. Much worse!

How much worse did you say?

During the last 15 years company pension plan contributions and benefits have deteriorated dramatically!

The last 15 years have been "extremely unkind" for current and future company pension beneficiaries. A gradual erosion of pension contributions and benefits has taken place, starting with:

The controversial cancellation of the dividend tax credit on company pensions, in 1997. While effecting employers only, eventually it has costed billions of "lost" entitlements to future pensioners

The closure of many final salary pension schemes to new members: -employers have altogether stopped contributing up to 20 per cent of salary

The introduction of defined contribution pension schemes whereby employers contribute up to 6 per cent of salary, but only in the ‘good’ years!

The removal of the link between company pensions and increases to the Retail Prices Index which includes housing costs such as mortgage interest payments. During 2011, the Government plans now to link increases to the Consumer Prices Index instead, which is typically lower.

This will not only affect already retired people but also employees who are still building up their benefits.

The RPI traditionally rises considerably faster than the CPI, affording much greater protection against inflation. On average the CPI has been almost 1 per cent lower than RPI over the last 25 year. Over 30 years, pensions may well be 25 per cent smaller than they would have been if the current system would have been maintained.

The introduction of NEST: with the prospect of a further “levelling down” of pension contributions by employers to the contribution level set by NEST – just a meagre 3 per cent!

What to do next?

With the ongoing downward trend of employers’ contributions and retirement benefits it is clear to me that the future for the pensions of everyone in the private sector is getting increasingly worse, unless you take action yourself immediately.